The housing slump, mortgage subprime meltdown and poor retail sales are just a few reasons touted as evidence of a looming U.S. economic crisis. And not surprisingly, the weak dollar is lauded as good for the U.S. economy because it makes American exports cheaper and, therefore, helps close the trade deficit. But over the long term, the value of a country”™s currency is seen as a verdict on the overall health of its economy.
The weak dollar creates ripples around the world. Some ripples are good, some bad. Where you stand on the weak dollar depends largely on where you sit.
The following, somewhat complex, circular flow of the dollar is noteworthy. Let”™s begin with some context. According to a 2007 International Monetary Fund report, China”™s output is projected to contribute about 22 percent to the world”™s gross domestic product (GDP) growth in 2008, almost equal to all Western European countries combined. In contrast, the U.S. is projected to contribute just 15 percent. That”™s alarming considering the same report pegs the U.S. at 27 percent and China at 6 percent in 2006.
At the current trajectory China”™s impact on the world”™s economy is staggering. Many consumer goods sold in the U.S. are made in China and the Chinese yuan is, in effect, pegged to the dollar, so fluctuations on the currency market don”™t greatly affect prices for Chinese-made goods, for the moment. Business Week calls this phenomenon “The China Price.” A retailer like Wal-Mart has the ability to go back to any of its long-term suppliers and demand they meet the China Price, or else. The good news is these savings are passed on to the American consumer.
No such cushion, though, applies to oil prices. They are high, exceeding $100 a barrel in January, and that was due in part to the weak dollar: Oil-rich nations charge higher prices to compensate for the weaker dollar. In this case, that translated to an all-time high for home oil prices, hitting $3.50 a gallon in Westchester during the same month. If one household consumes 150 gallons a week, a little above average, that”™s more than $2,000 a month. At these oil and gas prices, assuming a continued correlation, and extrapolated across other regions within the U.S., the logical conclusion is that a large percentage of the consumer disposable income is spoken for. Further, consider that consumer spending comprises close to 70 percent of GDP ”“ the result is obvious: sustained energy prices will continue to create a noticeable drag on the economy.
Moreover, whether it”™s our dependence on foreign oil or the China Price phenomenon, the effect is the same: The outflow of U.S. dollars to Asia and, to a certain degree, the Middle East, enables them to buy more of the U.S.
In addition to holding a sizable portion of our debt ”“ via U.S. Treasury securities that float our burgeoning deficit ”“ foreign firms have now branched out into snatching U.S.-based companies at the fastest pace in seven years. Chinese institutions”™ appetite for U.S. companies, in particularly, has been strong. They upgraded their investments from U.S. staples like Maytag and Levono (PC division of IBM in Westchester) in 2005 to equity giants like the Blackstone Group and Bear Stern in 2008, to name a couple. And according to Bloomberg L.L.P., Abu Dhabi, the largest emirate in the United Arab Emirates, now ranks as largest shareholder in one of the U.S. premier banking institutions ”“ Citigroup.
This parasitic relationship provides false comfort, as the resulting large trade deficits are unsustainable.
The dollar has been losing its charm as a reserve currency due to its persistent weakness against a host of other international currencies. U.S. government policies must move beyond the control of interest rates and the supply of money. The need is to reduce the deficit and strengthen the dollar ”“ moves that would restore its value and luster internationally ”“ as critical steps in the overall strategy to revive the U.S. economy.
